May 11, 2015

The UK Labour party should blame Keynes for their election defeat | Niall Ferguson

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redit where credit is due. Lynton Crosby is getting the plaudits for the Conservative party’s successful election strategy, but the real architect of this victory was surely George Osborne, the chancellor. Leave aside Labour’s collapse in Scotland, arguably the election’s most striking result. In England, the Conservatives won because Mr Osborne was right and his critics were wrong.
The comedian Russell Brand was not alone in having his celebrity endorsement of Labour roundly ignored by the voters. Even more ignominiously humbled were the Keynesian economists who have spent so much of the past five years predicting that the economic consequences of Mr Osborne’s policies would be disastrous.

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In the vanguard of the Keynesian attack was Paul Krugman of The New York Times. In August 2011 he denounced the “delusions” of the chancellor whose “experiment in austerity” was “going really, really badly”.
Why? Because, in seeking to bring the government’s deficit under control, Mr Osborne was worrying needlessly about business confidence. “The confidence fairy” was the term Mr Krugman coined to ridicule anyone who argued for fiscal restraint.
Unfortunately for Mr Krugman, the more he talked about the confidence fairy, the more business confidence recovered in the UK. In fact, at no point after May 2010 did it sink back to where it had been throughout the past two years of Gordon Brown’s catastrophic premiership.
Mr Krugman was equally relentless in predicting that austerity would lead to recession; indeed, he insisted that the UK’s economic performance would be worse than during the Great Depression. In April 2012 he warned darkly that Britain would “continue on a death spiral of self-defeating austerity”.
It was, he lamented, a “policy disaster” that would cause a double-dip recession and “cripple the UK economy for many years to come”.
In fact, there was no double-dip recession. The UK had the best performing of the G7 economies last year, with a real gross domestic product growth rate of 2.6 per cent. In 2009, the last full year of Labour government, the figure was minus 4.3 per cent. Moreover, far from being in depression, the UK economy has generated more than 1.9m jobs since May 2010. UK unemployment is now 5.6 per cent, roughly half the rates in Italy and France. Weekly earnings are up by more than 8 per cent; in the private sector, the figure is above 10 per cent. Inflation is below 2 per cent and falling.
Meanwhile, the government’s much-derided policy of fiscal stabilisation has also been a success, even if the extent of deficit reduction fell short of Mr Osborne’s original goal. According to the International Monetary Fund, the general government deficit has been nearly halved from 10 per cent in 2009 to 5.7 per cent last year; the structural deficit more than halved from 9.8 per cent to 4.2 per cent. The net public debt has been stabilised at roughly the same level relative to GDP as that of the US.

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Few governments since 1945 have achieved comparable economic results from such a difficult starting point. If the opinion polls had been right, and the Tories had not won this election, it would have been a travesty.
Last week’s result thus fits into a simple pattern of postwar history. Labour governments have generally caused either inflation or unemployment or both to rise, or at least not to fall. Conservative governments have generally done better. However, the electorate has not always rewarded the Tories for their economic competence. In 1945, 1964, 1974 and 1997 voters felt that, after doing what had to be done under the Conservatives, they could now indulge themselves with a flutter on Labour, which remains, incorrigibly, the party that promises to spend more on the welfare state by taxing the rich.
Not this year. Throughout the campaign, Labour leader Ed Miliband and Ed Balls, his shadow chancellor, trailed their Tory counterparts on the issue of economic competence. The electorate had not forgotten Labour’s disastrous stewardship before and during the financial crisis. Nor did they miss that Mr Miliband and Mr Balls had (temporarily) swallowed Mr Krugman’s fairy story of austerity-driven double-dip recession.
True, not all those who intended to vote Tory showed their hand to the opinion pollsters, who have almost as much egg on their faces as the Keynesians. Next time, however, the pollsters can simply adjust their projections by using a simple economic model. Just so long as they make sure it’s not a Keynesian one. Shame where shame is due.

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